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The Redistributive Benefits of Progressive Labor and Capital Income Taxation

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  • Fabian Kindermann
  • Dirk Krueger

    (University of Pennsylvania)

Abstract

In this paper we argue that a capital income tax is an effective tool for redistribution and insurance even when progressive labor income taxes are available to the policy maker. To make this point we construct a large scale Overlapping Generations Model with uninsurable income risk, show that it has a wealth distribution that matches the data well, and then use it characterize fiscal policies that achieve a desired degree of redistibution in society. We find that it is suboptimal to rely exclusively on progressive labor income taxes to achieve any given level of redistribution in society, and thus that a positive capital income tax should be part of a government policy aimed at redistributing welfare across ex ante homogenenous, but ex post heterogeneous households. We finally characterize the optimal Rawlsian poliy and find that it includes a significantly positive capital in addition to a redistributive labor income tax.

Suggested Citation

  • Fabian Kindermann & Dirk Krueger, 2014. "The Redistributive Benefits of Progressive Labor and Capital Income Taxation," 2014 Meeting Papers 221, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:221
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    Cited by:

    1. Adam Blandin, 2015. "Disciplining the Human Capital Model: Learning By Doing, Ben-Porath, and Policy Analysis," 2015 Meeting Papers 1147, Society for Economic Dynamics.
    2. Alejandro Badel & Mark Huggett & Wenlan Luo, 2020. "Taxing Top Earners: a Human Capital Perspective," The Economic Journal, Royal Economic Society, vol. 130(629), pages 1200-1225.
    3. Simon Bösenberg & Peter Egger & Benedikt Zoller-Rydzek, 2018. "Capital taxation, investment, growth, and welfare," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(2), pages 325-376, April.
    4. Badel, Alejandro & Huggett, Mark, 2017. "The sufficient statistic approach: Predicting the top of the Laffer curve," Journal of Monetary Economics, Elsevier, vol. 87(C), pages 1-12.
    5. Cruz Echevarría, 2015. "Income tax progressivity, growth, income inequality and welfare," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 6(1), pages 43-72, March.
    6. Fatih Guvenen & Greg Kaplan & Jae Song, 2014. "The Glass Ceiling and the Paper Floor: Gender Differences among Top Earners, 1981–2012," Working Papers 716, Federal Reserve Bank of Minneapolis.
    7. Brüggemann, Bettina & Yoo, Jinhyuk, 2015. "Aggregate and distributional effects of increasing taxes on top income earners," IMFS Working Paper Series 94, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).

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